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What Will Google Do With Its IPO Billions?

Posted on: Thursday, 6 May 2004, 06:00 CDT

SAN FRANCISCO -- With hype in overdrive over Google's imminent stock offering, the latest parlor game in Silicon Valley is guessing how the hottest Internet search engine on Earth will spend the billions raised by its IPO.

What Google does with its newfound loot -- it has earmarked $250 million for capital spending, according to its IPO filing -- might determine its fate amid increasing competition from Microsoft and Yahoo. Analysts say Google needs to improve and expand its services to maintain its lead in the market for paid search. The market is expected to swell to $4.8 billion in 2005 from $2 billion last year, says Deutsche Bank Securities.

Google's auction-style IPO, expected to fetch $2.7 billion this year, will be added to a war chest of $455 million in cash and short-term investments -- almost as much as eBay had after its IPO. The company could invest in:

* New products. Google is expected to spend a higher percentage of its revenue on research and development. Last year, 9.5% of its revenue, or $91.2 million, went to R&D. Yahoo, by comparison, spent 13% of its 2003 revenue.

There is no dearth of ideas at Google Labs, the company's R&D arm. Executives keep a Top 100 priorities list, which today includes more than 240 items. So far, it has produced Gmail, a free service that makes it easier for users to organize and find e-mail; Froogle, a comparison shopping service; and Orkut, a social-networking site.

Google could go in many directions to build on its expertise in online search, says Scott Lundstrom, chief technology officer at AMR Research.

If Gmail is a success, he says, a Google version of instant messager could follow. It could delve into multimedia searches, allowing users to look for video images and sound bites. Google might also explore fee-based services for businesses to find market research. Such endeavors require heavy investments in powerful Internet servers to keep Google's performance swift.

* Products under development. The company might plow more money into Web Alerts, which deliver e-mail messages daily or weekly on specific content to PCs and cellphones, and Personalized Web Search, where users create a personal profile for results tailored to their interests. Getting those services to market is especially important because Yahoo has already gathered 141 million customer profiles to deliver customized content.

* Acquisitions. Google might invest in or buy companies to cultivate Internet ad sales and international operations. Yahoo has spent $2.5 billion for a trio of companies to go after Google. Google, by comparison, made four acquisitions for $117 million last year, its filing says. Google could pick up publicly traded online ad agencies such as DoubleClick, with a market value of $1.1 billion, or aQuantive, valued at $617 million, to make better use of Google's AdSense technology. AdSense searches the text of Web pages and lets companies post relevant ads. Like eBay, Google might expand abroad with mergers. In its filing, Google says bulking up internationally is crucial to its long-term success. Almost a third of its first-quarter sales came from outside the USA, compared with 26% a year ago.

Another possibility: The investment in or purchase of a Linux desktop company so Google can extend searches to information stored on a PC. Microsoft's pending version of its Windows operating system, code-named Longhorn, would let consumers search Web pages, e-mail and Word documents on their PC hard drive. ''Google might take it further and allow searches over a company's computer network,'' says analyst Martin Pyykkonen of Janco Partners.

Google had no comment on its spending plans, and its phone-book-thick prospectus is sketchy about business strategy. Google co-founder Larry Page, however, offers platitudes on the evils of Wall Street's preoccupation with short-term profit at the expense of long-term health.

Industry watchers say Google must move quickly to stay ahead of the competition. ''Google needs to build on its edge as a search engine,'' says James Lamberti, vice president of industry solutions at market researcher ComScore Networks. ''If it doesn't, Yahoo and Microsoft will swoop in for the kill.''

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